Technology has been a culprit behind runaway health costs. It might now help tame them

AS THE developed world grows older and sicker and the developing world gets richer and fatter, demand for health care will only grow. Governments are already having to adjust. Barack Obama wants to bring 46m or so uninsured Americans into his country's patchy health system. China's leaders have just unveiled a $120 billion scheme to expand health insurance for the country's poor (see article). Several other developing countries have similar schemes.

The snag is the cost. The health systems of Western Europe, which already offer universal coverage, are struggling to cope with soaring costs. According to the Congressional Budget Office, Medicare and Medicaid, the American government schemes for the elderly and the indigent, will increase from 4% of GDP in 2007 to 12% in 2050—with three-quarters of the surge a result of cost inflation, as opposed to an ageing population.

A lot of those extra costs come from new technology—which is odd. In most other industries, new more productive technologies drive costs down: thus the word processor replaced the typewriter, and the fax (and then e-mail) replaced the telex. That does happen in medicine: new treatments for cardiovascular patients and for babies of low birth-weight have delivered benefits far outweighing their costs. But it does not happen nearly enough. Either the old kit stays in service (a fancy imaging machine rarely puts the old X-ray out of commission) or too much is paid for pointless “innovations”: witness the money spent on the latest, only marginally superior “me too” pill, when cheaper generic versions exist.

The reasons for this vary from country to country, but two things pop up repeatedly: distorted payment systems (the doctor prescribing the pricey pill seldom pays for his inefficiency) and a lack of proper competition. Medical-device manufacturers often expect reimbursement for expensive new equipment on a “cost plus” basis, a practice rarely seen in competitive markets, and drugs companies enjoy temporary monopolies on new pills that may be no better than cheaper alternatives on the market today. This is an industry which has largely managed to escape even basic cost-benefit analysis.

Our special report this week argues that change may finally be under way. It is prompted, in part, by a host of information and communication technologies that should make health care much more portable, precise and personal. The spread of electronic medical records and the emergence of a “smart grid” for medicine (so doctors, and in some cases patients, can see what their peers are doing) should bring more transparency. “Intelligent pills” that come tailored to people's needs should be cheaper than the one-drug-fits-all variety, especially if the doses do not have to rely on humans remembering when to take them. Personal medical monitors and other devices should make it easier to treat expensive chronic diseases that last for years, such as diabetes and heart defects, on a preventive basis. Your ticker can be monitored at home remotely rather than having to come in for check-ups, and problems can be spotted in advance, thus avoiding costly hospitalisations.

Change is also being prompted by the willingness of doctors and politicians, especially ones in poorer countries, to apply at least some economic tests to medical spending. One example is India (see article), where poor patients mostly have to pay for their own health care: its techniques and business models may yet be copied in the rich world. Another leader is Britain's National Institute for Health and Clinical Excellence (NICE), which has championed the use of basic economic appraisals, albeit in an over-centralised way. Mr Obama wants to expand comparative effectiveness studies and health technology assessments. These sound boring but could save billions, which is one reason so many health-care firms moan about them.

Power to the people

The arrival of digital medicine promises to shake the medical establishment to its roots, not least because it will hand so much more information over to patients themselves. But the biggest savings will not come through exotic pills or “patient empowerment”, but from the application of basic economics. Realign the incentives in health care so that innovation focuses on making patients better and health care cheaper, Mr Obama, and you will be half way there.